Richard C. Longworth, senior fellow at The Chicago Council on Global Affairs, contributes his knowledge and ideas about issues that affect the Midwest.

Wednesday, January 23, 2013

The Middle Class: Notes on the Great Debate

The Great American Debate these days centers on what's happened to our economy and the middle class it once supported.

This debate has so many moving parts -- inequality, offshoring and reshoring, big government vs. little government, globalization, technology, automation, taxation, education, American decline, the role of business, deficits -- that it's hard to grasp. This hasn't stopped virtually every economist and pundit from weighing in, in an attempt to understand how we got here and what we do about it.

It's about time. As a reporter for the Chicago Tribune, I co-authored a week-long series in 1995 on the vanishing middle class. For that matter, my files contain an article I wrote in 1984 -- 29 years ago -- entitled "Our Endangered Middle Class," pointing out that traditional jobs, especially in manufacturing, were being affected as companies responded to global competition, mostly Japanese in those days, with automation, layoffs and lower wages.

If this makes me sound uniquely insightful, that's wrong. As a journalist, I only reported what other people told me and tapped the wisdom of experts studying the problem. In other words, many people saw the problem 20 or 30 years ago, but it has only now moved to the top of the national agenda.

In this blog, I intend to keep an eye on this debate and flag articles, papers or books of particular interest, especially to Midwesterners and their communities, where this decline has hit hardest.

One recent article that's received attention, especially in pro-business circles, is "The Once and Future Liberalism," by Walter Russell Mead. Mead's thesis is that the liberal ideals and institutions that powered the widely-shared American prosperity until 1979 "don't work anymore." This was a time of steady jobs, narrowing inequality, broad education and assured retirement, with each generation living better than the last. Mead makes this "blue model" sound pretty good, but says it can't be sustained in the face of global competition. Business abandoned this model 30 years ago, he says, and government has to do so now.

Mead makes it all -- the loss of good jobs and a decent social safety net -- sound inevitable. In fact, he says, it's all for the best, because Americans no longer have to hold "repetitive, meaningless, soul-killing" jobs -- an attitude that could only come from an academic who never had to rely on one of those soul-killing jobs to feed his family.

Mead's prose is so elitist that it's easy to ignore his more solid points -- especially that our social system and the government that supports it is no longer realistic and has to go. Many conservatives make this point but say that all we have to do is eliminate taxes and choke the government. Mead's arguments are more sophisticated than that, but he never suggests an alternative. The old adage -- that we shouldn't scrap something of value unless we have something better to take its place -- still holds true. Mead doesn't help us here.

Nor does he make much mention of the role of business and major corporations in creating this jam or how they can get us out. That job goes to Hedrick Smith, formerly a Pulitzer Prize-winning reporter for the New York Times, now author of a new book, Who Stole the American Dream?

As the title implies, Smith thinks the American dream didn't just dwindle but was actually stolen. And he knows who the thieves are -- American business leaders, their financiers and lobbyists, who have spent the last 40 years undermining regulation, buying the federal government, destroying unions, financing libertarian think tanks and otherwise plotting to take more of America's wealth and leave less for everybody else.

Smith is a first-rate reporter with several solid books to his credit. If his book seems overly conspiratorial, it echoes the more solid but stolid prose of Joseph Stiglitz, the Nobel Prize-winning economist, in arguing that there was nothing inevitable about the decline of America's middle class. Both men say the problem is more political than economic and has much more to do with governmental manipulations in Washington than with impersonal markets.

Smith pretty much ignores the part that globalization played in this drama. Globalization, in fact, has been a key factor, in enabling corporations to escape the bounds of American laws and regulations -- indeed, the responsibilities of American citizenship: in other words, globalization gave corporations and their leaders new opportunities to do what they wanted to do anyway. They took the opportunities, leaving everyone else behind. Smith thinks that many of the changes we've seen over 40 years would have happened, with or without globalization.

Michael Spence, another Nobel Prize-winning economist, says globalization has been key in taking manufacturing jobs overseas. His insight is that this is nothing more than a free-market economy working as it's supposed to, to seek maximum efficiencies. Not that he approves of this: his statement, that a well-functioning market economy can actually be bad for society, is certain to appall many other Nobel Prize winners, including the free-market mavens at the University of Chicago.

A blogger for Reuters, Chrystia Freeland, says the same thing in clearer prose. Freeland, author of a good new book, Plutocrats, says in her blog that the innovation and e-commerce that drives much of today's economy is one reason why the middle class is being hollowed out. Yet another is that what's good for corporations and the other big global players has nothing to do with what's good for the rest of us.

The Associated Press has just started a new series along this line, arguing that technology is killing the middle class, in both America and western Europe. In manufacturing, it's robots. In service industries, it's computerized operations that enable us to do for ourselves what humans used to do: think ATMs, or self-serve gas pumps, or on-line purchases of books or clothes.

Many of these jobs disappeared in the recession, the AP says. The problem is, they're not coming back, as they did after earlier recessions. The US lost 7.5 million jobs in the recession: half were in middle class occupations. We've regained 3.5 million of those jobs -- but only 2 percent of them in the middle-class pay range.

There's a new flurry of articles arguing that global corporations actually are coming to our rescue, by "reshoring" jobs from China and other low-wage places back home to America. If offshoring sent millions of jobs abroad, they say reshoring will bring them home. Two recent articles in the Atlantic magazine, "The Insourcing Boom" and "Mr. China Comes to America," made this point, as does a special 20-page survey in the Economist. Much of this rests on research by the Boston Consulting Group (BCG), plus some reshoring by General Electric and other companies.

It's a lovely thought, full of good news for Midwestern cities who have seen manufacturing jobs fly from Iowa and Ohio to Juarez and Shenzhen. The problem is that there's not much evidence to back it up -- at least not yet. The Atlantic and the Economist may be on to something, but it's too early to celebrate.

As the Economist concedes, fewer than 100 U.S. companies have brought back manufacturing from China, not exactly a tsunami. GE has indeed returned some manufacturing to its big Appliance Park in Louisville. But this site once employed 23,000 workers, shrunk over the years to only 1,863, and is now back to 3,600, thanks to reshoring. No one is sniffing at these new jobs, but this total is still only 15 percent of the former workforce.

Much of the BCG analysis is based on anecdotes or on predictions by executives of what they're going to do, not on what they've done so far. And the Economist notes that returning production will be aimed at the U.S. market: production that used to go into exports is gone forever.

But the biggest factor is that these companies will come home to a very different nation that they left. Offshoring has crippled unions, driven down wages and demoralized the middle class. Americans are so grateful for a job that they're taking lower pay, two-tier pay structures, right-to-work laws, and fewer benefits. Even then, robots are enabling returning companies to produce in America without hiring many Americans.

If one was of a conspiratorial nature, one might think that offshoring had precisely this aim, to make America a low-cost place to make things. Just like China.

FYI: Walter Russell Mead wrote a very lengthy series exploring the ideas in that article in more depth called "Beyond Blue" should you care to Google it. He's also very critical of the plutocracy in many of his other writings. I think you'll find him one of the more moderate voices of the right out there. (He's very laudatory towards State Department diplomats generally, for example). And he's dead on that the old model is dead. If he doesn't have a complete new solution, well, neither does anybody else.

The Global Midwest Initiative of The Chicago Council on Global Affairs is a regional effort to promote interstate dialogue and to serve as a resource for those interested in the Midwest's ability to navigate today's global landscape.